An LLC can help with taxes, but the savings come from how you use it rather than from the LLC itself. Pass-through taxation avoids the double tax that hits traditional corporations, ordinary business expenses reduce what you owe, the Section 199A deduction knocks up to 20% off qualified business income, and an S-Corp election can trim thousands off self-employment tax once profits are high enough to justify the extra paperwork.
How LLC Income Gets Taxed by Default
The IRS doesn’t treat the LLC as its own tax entity. A single-member LLC is a “disregarded entity” by default, meaning business income and expenses flow straight onto Schedule C of your Form 1040. A multi-member LLC is taxed as a partnership: the LLC files an informational Form 1065 and pays no federal income tax, and each member reports their share of profits and losses from a Schedule K-1.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
The tradeoff for that simplicity is self-employment tax. LLC income isn’t run through employer payroll withholding, so you owe both halves of Social Security and Medicare: a combined 15.3%. That’s 12.4% for Social Security on the first $184,500 of net earnings in 2026, plus 2.9% for Medicare on all net earnings with no cap.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The IRS applies self-employment tax to 92.35% of net business income rather than the full amount, which accounts for the deduction-equivalent of the employer half.3Internal Revenue Service. Self-Employment Tax
If your net self-employment income tops $200,000 (or $250,000 married filing jointly), you also owe an Additional Medicare Tax of 0.9% on the amount above that threshold. There’s no employer match on the surtax.
Business Deductions That Cut Your Taxable Income
Every LLC can deduct the ordinary and necessary costs of running the business under Section 162 of the Internal Revenue Code: if an expense is common in your industry and helpful to your business, it’s deductible.4Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses That covers marketing, software, supplies, accounting and legal fees, and equipment (which can be depreciated over time or expensed immediately under Section 179).
Vehicle and Travel Costs
Business driving is one of the most common write-offs. For 2026, the IRS standard mileage rate is 72.5 cents per mile, up from 70 cents in 2025.5Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents You can use that simplified rate or track actual expenses (fuel, insurance, maintenance, depreciation) and take whichever is larger. Airfare and hotels for business travel are deductible in full; meals are limited to 50%.
Home Office
Space in your home used exclusively and regularly for business generates a deduction proportional to the square footage. Divide your office’s footprint by the home’s total to get the percentage of rent or mortgage interest, utilities, insurance, and repairs you can write off.6Internal Revenue Service. Publication 587 (2025), Business Use of Your Home A simplified option pays $5 per square foot up to 300 square feet, capped at $1,500. It’s easier, and almost always smaller than the actual-expense method.
Startup Costs
Money spent getting the LLC off the ground before it opened, such as market research, training, advertising, and professional fees, can be deducted up to $5,000 in the first year. That $5,000 shrinks dollar-for-dollar once total startup spending passes $50,000. Whatever’s left is amortized over 180 months.7Office of the Law Revision Counsel. 26 USC 195 – Start-Up Expenditures
Health Insurance Premiums
Self-employed LLC owners can deduct 100% of health, dental, and long-term care premiums paid for themselves, a spouse, and dependents. Two limits apply: you can’t be eligible for coverage through a spouse’s employer plan, and the deduction can’t exceed your net business income. It’s claimed on your 1040 rather than Schedule C, so it lowers income tax but not self-employment tax.
The 20% Qualified Business Income Deduction
Section 199A lets most LLC owners deduct up to 20% of qualified business income before calculating income tax, effectively taxing only 80 cents of every dollar the business earns.8Internal Revenue Service. Qualified Business Income Deduction The deduction had been scheduled to expire after December 31, 2025, but the One Big Beautiful Bill Act, signed July 4, 2025, made it permanent.9Internal Revenue Service. One, Big, Beautiful Bill Provisions
If your total taxable income for 2026 is under $201,750 single or $403,500 joint, you take the full 20% without restrictions. Above those thresholds, limitations phase in over the next $75,000 (single) or $150,000 (joint), tied to how much the business pays in W-2 wages and the value of its physical assets. Owners of “specified service” businesses (law, medicine, accounting, consulting, financial services) lose the deduction entirely at the top of the phase-out range. The overall deduction also can’t exceed 20% of your total taxable income minus net capital gains.
Electing S-Corp Status to Lower Self-Employment Tax
This is the planning move that produces the biggest single-year savings for profitable LLCs. Elect S-Corp treatment on Form 2553 and the LLC’s income splits into two buckets: a reasonable salary that runs through payroll (and owes Social Security and Medicare taxes), and remaining profits distributed as shareholder income that owes neither.10Internal Revenue Service. About Form 2553, Election by a Small Business Corporation
How the Math Works
Take an LLC earning $160,000 in profit. Without the S-Corp election, the whole $160,000 is subject to self-employment tax, roughly $22,600. Elect S-Corp status, pay yourself an $80,000 salary, and payroll taxes apply to that $80,000, or about $12,240 combined. The other $80,000 passes through as a distribution owing no Social Security or Medicare tax. That’s more than $10,000 saved in a single year.
The election pays off when profit consistently outruns a reasonable salary by a wide margin. On modest profits, say $50,000 to $60,000, running payroll, filing a separate Form 1120-S, and often paying a payroll service can eat the savings.
Filing Deadline
To take effect for the current tax year, Form 2553 must be filed within two months and 15 days after the start of that year. For calendar-year businesses, the deadline is March 15.11Internal Revenue Service. Instructions for Form 2553 Miss it and the election waits until next year, unless you qualify for late-election relief by showing reasonable cause. New LLCs get the same window starting from their formation date.
The Reasonable Salary Trap
The IRS watches S-Corp salaries closely. You can’t pay yourself $20,000 on a business earning $200,000 and call it reasonable. The salary has to reflect what someone with your skills and responsibilities would earn doing similar work in your industry. Courts have repeatedly reclassified distributions as wages subject to employment tax when S-Corp owners took distributions while performing significant services for the business.12Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers On top of back taxes and interest, the IRS can add a 20% accuracy-related penalty under Section 6662 for the underpayment.13Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Keep records of comparable salary data from your market to back up the number you chose.
Retirement Contributions That Shelter Income
Pre-tax contributions to a self-employed retirement plan reduce your taxable income dollar-for-dollar in the year you make them, and the money grows tax-deferred.
A SEP IRA lets you contribute up to 25% of net self-employment income, capped at $69,000 for 2026.14Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) Setup is simple, paperwork is minimal, and you can wait until your tax filing deadline (including extensions) to fund the prior year. There are no employee elective deferrals, so everything comes from the employer side.
A Solo 401(k) offers more room. In 2026, you can contribute up to $24,500 as an employee deferral plus an employer profit-sharing contribution of up to 25% of compensation, with a combined cap of $72,000.15Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 At 50 or older, an extra $8,000 catch-up brings the ceiling to $80,000; owners 60 through 63 get an $11,250 catch-up for a $83,250 potential total. A Solo 401(k) can also include a Roth option for after-tax contributions that grow and come out tax-free.
The Solo 401(k) is limited to business owners with no full-time employees other than a spouse. Once you hire staff, you’ll typically shift to a standard 401(k) or a SEP IRA.
Quarterly Estimated Payments
Since nothing is being withheld from LLC income, you pay taxes yourself in quarterly installments. Miss or underpay them and the IRS charges interest on the shortfall, currently 7% annually and compounded daily.16Internal Revenue Service. Quarterly Interest Rates
For 2026, the quarterly deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. You can skip the January 15 payment if you file your full 2026 return and pay the balance by February 1, 2027.17Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals To sidestep underpayment penalties, pay at least 90% of your current-year tax liability or 100% of last year’s tax (110% if your prior-year adjusted gross income was over $150,000). Basing quarterly payments on last year’s tax and truing up with the final payment is often the easiest approach.
State Fees and Taxes Can Offset Federal Savings
The federal picture only tells half the story. Most states charge an annual fee, registration renewal, or franchise tax to keep an LLC active, and these range from nothing in some states to $800 or more in the most expensive jurisdictions. Some states impose that minimum whether the business earned anything or not.
A number of states also apply their own income tax to LLC earnings, calculated separately from your federal return. Sell into multiple states and you may trigger sales tax obligations under economic nexus rules; the most common threshold is $100,000 of sales into a state over a 12-month period, though some states set the bar higher or lower. Cross it and you have to register, collect, and file in that state.
Missing state requirements can lead to administrative dissolution, loss of liability protection, and penalties that vary widely. Factor the specific fees, taxes, and filing rules in the states where you operate into any calculation of whether the LLC actually leaves you ahead.